If you're eligible for both a public pension and Social Security, the Windfall Elimination Provision and the Government Pension Offset may reduce your benefits.
These represent some of the more technical areas of Social Security planning and you really should consider consulting an advisor.
Even given the impact of these rules, it is still important to carefully consider when to file.
I'm retiring soon with a pension that's outside of the Social Security system. I've also earned enough credits from earlier employment to qualify for Social Security benefits. I know my benefits will be reduced because of Windfall Elimination/Pension Offset reductions. Are there any strategies to minimize these reductions? Is there any reason to delay filing for Social Security? If it matters, my wife is also eligible for benefits under her own work record. —A Reader
This is a tough question to answer, primarily because the Windfall Elimination Provision/Government Pension Offset (WEP/GPO) rules present one of the more technical areas of Social Security planning. The formulas determining reductions are complex, and a lot depends on your individual situation.
So my first recommendation is to consult with a financial advisor or accountant who specializes in Social Security benefits. While it is not possible to avoid the WEP/GPO reductions (except by working longer while covered by Social Security), there are things for you to consider regarding the best time to apply for benefits, so it is important to understand your options. Before we get into those specifics, however, let’s first review the basics of both the Windfall Elimination Provision and the Government Pension Offset.
How the Windfall Elimination Provision (WEP) works
This provision affects people like you who have earned a pension in the public sector that didn’t require paying Social Security taxes (for instance, firefighters, police officers and public school teachers in some states) and also worked in the private sector long enough to qualify for Social Security benefits. State and local governments may opt out of the Social Security retirement system by providing their own retirement plans. On the surface, it sounds like the best of both worlds. Unfortunately, it doesn't work exactly that way because when you collect a public pension from employment when you weren’t paying into Social Security, your Social Security benefits may be reduced.
The amount of the WEP reduction depends on a number of factors, including how long you worked in the private sector vs. the public sector, the amount of your pension and Social Security benefit, and how much you earned. If, for instance, you paid Social Security taxes for more than 20 years and had what the Social Security Administration (SSA) determines to be “substantial earnings,” your benefit reduction would likely be less than someone who paid taxes for fewer years and earned less. However, if you paid Social Security taxes for more than 30 years, there’s no reduction at all.
Ssa.gov has tables and calculators on WEP to help you determine your specific reduction based on your earnings history; however, you should consult your tax advisor.
The Government Pension Offset (GPO) effect on spousal benefits
The GPO applies to those who collect a public pension and also are eligible for Social Security spousal or survivor benefits. Normal spousal benefits are 50% of a spouse’s benefit taken at Full Retirement Age (FRA). Normal survivor benefits are 100% of the decedent’s (higher) Social Security benefit. Essentially, GPO reduces these benefits by two-thirds of your non-covered government pension. For example, if your pension were $1,200 a month, two thirds of that amount, or $800, would be deducted from your potential spousal, widow or widower’s benefit. This reduction could eliminate your spousal benefit or survivor benefit entirely if your own WEP-adjusted Social Security benefit is higher.
This may seem like a big reduction, but it was designed to sync up with general Social Security rules, which typically provide for making spousal and survivor payments based on the higher amount derived from you or your spouse’s covered work history.
Things to think about in terms of Social Security timing
How these provisions apply to you and how they may affect your timing for collecting Social Security benefits is where it gets highly individualized and goes way beyond the scope of this column. Just to give you an idea, here are some things an advisor would want to discuss with you:
- The age difference between you and your wife
- The amount of the WEP/GPO reduction
- Life expectancy for both you and your wife
- The amount of your individual Social Security benefits relative to one another
- The type of pension you have and the survivor benefit it offers
Part of your discussion will involve the pros and cons of taking your benefits now or waiting until later. For instance, on the one hand, your Social Security benefit will increase by 6 to 8 percent each year you delay collecting between your full retirement age and age 70—even if it is reduced because of the WEP. This could mean a healthy increase in your own benefit as well as in survivor benefits. On the other hand, if your adjusted benefit is considerably smaller than that of your spouse, you might be just as well off collecting earlier.
Here's another possibility: If you were born before January 1, 1954, and your spouse has already filed for benefits, you could file what's called a restricted application. This would let you collect a spousal benefit based on your wife's work record. Granted, if you're collecting your pension, your spousal benefit would be reduced by the GPO, but it could still be a few extra dollars in your pocket while your own Social Security benefit continues to grow.
As with so much that has to do with Social Security timing, there's no easy, one-size-fits- all answer. And that's especially true when it comes to WEP/GPO. My recommendation is to use this information as a starting point, and then sit down with an advisor who can put it all together for your specific financial circumstances.
Have a personal finance question? Email us at email@example.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.